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Notes COPY Flashcards

1
Q

How do banks make money?

A

Buy low-rate short-term deposits

Sell high-rate, long-term loans

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2
Q

Don’t want a flat yield curve =>

A

indicator of a recession

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3
Q

When Fed Fund rate is above 10-year Treasury =

A

Inverted Yield Curve

  • indicator of a recession
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4
Q

Do inverted yield curves cuase recessions?

A

Anoswer: no

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5
Q

High short-term real interest rates =>

A

recessions

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6
Q

Money =>

A

decreased transaction costs => increased specialization => increased productivity => increased ∆Y/Y

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7
Q

Money is the storage of ______________

A

human energy

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8
Q

4 functions of money

A
  1. Medium of exchange - trade money for g/s
  2. Unit of Account - unit of measurement / measure value in terms of dollars
  3. Store of Value - Use todays income for tomorrow’s consumption
  4. Standard of deferred payment - money is legal tender in the repayment of debt
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9
Q

Full capacity =

A

82-84%

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10
Q

Capacity utilzation =

A

present production

potential production

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11
Q

Industrial production (output) fell________________

A

0.4% in October

up 1.7% y/y

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12
Q

Factory activity fell because of ____________________

A

Hurricane Sandy disruptions

-1.0 percentage points

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13
Q

Capital equipment spending and auto production should __________________

A

buoy activity into 2013

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14
Q

Manufacturing otput fell _______

A

0.9%

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15
Q

Weakness in manufacturing was __________________

A

uniform across many sectors

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16
Q

Output is contracting at a _____________ annual rate, due to ___________

A

3.3%

fiscal cliff worries

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17
Q

Utility output fell _______

A

0.1%

power outages from hurricanes

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18
Q

Mining output rose ________

A

1.5%

greater extraction of crude oil

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19
Q

Capacity utilization ratios are at ____________________

A

the lowest for the year

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20
Q

Real money balances =

A

X = M / Price level

M = amount of money

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21
Q

MD IS A FUNCTION OF

A

interest rate; YP

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22
Q

Liquidity Preference Theory

A

Decrease in interest rate => increase in Quantity demanded of money

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23
Q

If change in M/M = change in Y/Y then

A

Change in P/P = 0

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24
Q

Irving’ Fisher’s Assumption

A

If change in Velocity of money = 0

Then Inflation = change in money supply - change in output

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25
Q

Inflation annual: october data

A

1.2%

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26
Q

Inflation numbers:

A

0.1% m/m, 2.2% y/y

Falling energy prices countered surging good prices

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27
Q

Core inflation numbers

A
  1. 2% m/m, 2.0% y/y
  2. 4% annual

Big gain in shelter index (rents)

Right at federal reserve’s target

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28
Q

Expect lower inflation in 2013 due to a _________________________________

A

lack of broad pricing power and the subdued economic recovery

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29
Q

Lower future inflation will boost _____________________

A

real disposable income growth rates

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30
Q

The recent deceleration in inflation was a factor pushing the Federal Reserve to __________________________

A

implement another round of quantitative easing “QE-3” (print money to buy assets

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31
Q

Consumer confidence focuses on what?

A

labor market

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32
Q

Consumer confidence numbers

A

Rose from 73.1 to 73.7

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33
Q

Consumer Sentiment focuses on what?

numbers?

A

financial & personal income expectations

rose from 82.6 to 82.7

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34
Q

Rising confidence should _________________________

A

boost consumer spending

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35
Q

Optimism factors in consumer confidence

A

Labor market improvement

Falling debt burdens

Improving credit availability

Rising Stock Market

Falling gas prices

Improving housing market

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36
Q

Pessismism factors in consumer confidence

A

Fiscal cliff worries

High unemployment

Slow wage growth

Volatile stock prices

Fears of future tax increases

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37
Q

As economy grows and job growth strengthens expect ______________________

A

confidence to rise in 2013

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38
Q

Short Run Phillips Curve shows a negative relationship between _______________

A

inflation and unemployment

*shows inverse relationship

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39
Q

Structural relationship

A

Basic behavioral relationship that remains unchanged over long periods

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40
Q

Short-run Phillips curve is not __________________________

A

a structural economic relationship

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41
Q

Short-run phillips curve is not a permanent _______________

A

long-run tradeoff

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42
Q

Short-run phillips curve is not a reliable menu of _____________________________

A

inflation and Unemployment rate combinations in the long run

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43
Q

Long run phillips curve duration

A

over 5 years

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44
Q

short run phillips curve duration

A

6-9 months

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45
Q

Negative slope of phillips curve is due to __________

A

workers and firms inflation forecasting errors

*slope exists only if the change in inflation is unexpected (not predicted)

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46
Q

Inflation - expected inflation =

A

error

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47
Q

What happens if Inflation > expected inflation

A

Real wages fall

Firms higher more workers than planned

Decrease in Unemployment Rate

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48
Q

When inflation is higher than expected =>

A

Unemployment rate down

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49
Q

real wage < expected real wage

A

real wages fall

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50
Q

What happens if change in inflation < expected change in inflation

A

Real wage rises

Firms hire fewer workers than planned (or layoff people)

Increase Unemployment rate

51
Q

Need more inflation to __________________

A

lower unemployment rate

52
Q

w/P > w/P expected

A

real wage rises

53
Q

Empire State Manufacturing Survey Index

A

Percentage of respondents indicating an increase minus percentage indicating a decrease

If index > 0, then expansion

If index < 0, then contraction

54
Q

Empire State Manufacturing Survey

Current Index =

55
Q

Empire State Manufacturing Survey

Forecast index =

56
Q

6-month outlook is not encouraging for ______________

A

hiring and capital expnditures

57
Q

Empire State Manufacturing Survey

Unfilled orders index =

58
Q

Empire State Manufacturing Survey

New orders index =

59
Q

Empire State Manufacturing Survey

Shipments index =

A

15

optimistic leading indicator of future output

60
Q

Empire State Manufacturing Survey

Inventories index =

A

-12

good sign

61
Q

Prices paid index (beginning of the supply chain) is _____

62
Q

Prices received index is in ___________________

A

expansionary territory (gaining pricing power)

63
Q

In the long run, an increase in inflation will ____________

A

lead to an increase in wage growth, maintaining real wages

64
Q

In the short run, an increase in inflation will _______________

A

be greater than wage growth, leading to lower real wages without workers quitting

65
Q

NAIRU correlation

A

U.R. natural = NAIRU = U.R. at which ∆P/P has no tendency to rise or fall

66
Q

SRPC degree of slope is determined by:

A
  1. If workers and firms have adaptive or rational expectations
  2. The adjustment speed of wages and prices
67
Q

Adaptie expectations

A

Workers and firms look at last few years and assume inflation will be the same

68
Q

If adaptive expectations and slow wage adjustments, the slope is ____________

A

flat (price stickiness)

69
Q

The Fed wants ________________________

A

flat curve to decrease U.R. with little growth in inflation

70
Q

If inflation growth is moderate and stable and slow wage adjustments, then expectations are ________

71
Q

If rational expectations and fast wage adjustments, then slope is _____________

A

vertical

An expansionary monetary policy would be ineffective

72
Q

Causes of 2008-1010 Disinflation

A
  1. Output gap
  2. Lower expected growth in inflation = 1% => shift down SRPC
73
Q

Quantitative Easing 2

A

FED creating money to purchase assets

74
Q

QE 1 2009-2010:

A

Fed bought $1.75 trillion MBS and Treasury Securities

75
Q

QE-2

Fed’s statutory mandate

A

Foster maximum employment and price stability

76
Q

QE-2 two actions

A
  1. Fed will purchase a further $600 billion of longer-term Treasury Securities for the System Open Market Account (SOMA) by June 2011
  2. The open market trading desk will continue to reinvest principle payments
77
Q

Leading Economic Indicators Index =

A

=96

up 0.2% m/m, 2.3% y/y

78
Q

What does the Leading Economic Indicators show?

A

Recovery is continuing but remains weak

Economy has not yet reached “escape velocity” to become self-sustaining expansion

Business inventories are rising fast and could represent excess stock. This could be a harbinger (foreshadow) of weaker economic growth over the next few months

79
Q

Breadth/diffusion of index:

Leading Economic Indicators

A

4 or 10 components were positive, 2 unchanged, 4 negative

The breadth of the index is associated with economic durability

80
Q

Leading Economic Indicators

Strengthening components

A

Rising credit index

Steeper yield curve

Lower jobless claims

81
Q

Leading Economic Indicators

Negative components:

A

Falling building permits

ISM new orders

Stock prices

82
Q

Credit Crunch factors

A

Subprime/jumbo mortgage default concerns

Balance sheet assymetiric information

Weakening economy

*Fund flows dry up and shift supply left

83
Q

Dysfunctional Credit Markets

A

Subprime mortgage

Jumbo mortgage

Interbank

84
Q

Term Asset-backed Security Loan Facility

(TALF)

A

Restore credit flows to households and firms through the securitization market

85
Q

TALF loans characteristics:

A
  1. Non-recourse (Fed can only seize ABS)
  2. Secured by eligible collateral (AAA)
  3. 3-yr term
  4. Interest rate = 1-mo LIBOR + 100 bps (1%)

*LIBOR = London Interbank Offered Rate

  1. Loan-to-value & haircuts (4-12%)
  2. Interest payable monthly
  3. Borrower has option to prepay loan
  4. ABS capital remittance must be used to pay down TALF loan
86
Q

LIBOR

A

London Interbank Offered Rate

Rate banks lend money on the international market

87
Q

Recession =>

A

increase defaults => decrease demand for ABS => mkt. dislocation => decrease credit availability & increase interest rates => economic slowdown

88
Q

Revive the Shadow Banking System

2005-2006

A

$1 Trill/yr in funding

89
Q

3 stages of production

A

Crude materials => Intermediate goods => Finished goods

90
Q

Core inflation

A

excludes food and gas (too dependent on weather and war)

core finished goods have been extremely stable => labor costs (70%) are a huge part of the profit of finished goods (keep it stable)

91
Q

core finished goods

A

proxy for near term consumer inflation = 2.3%

92
Q

Core crude goods

A

leading indicator of global economic growth

93
Q

Core goods: finished

Numbers

A
  • 0.2% m/m
    2. 1% y/y

(falling vehicle prices)

94
Q

Core goods: intermediate

numbers

A

0 m/m

-0.5% y/y

95
Q

Core goods: crude

A
  • 1.4% m/m
  • 5.9% y/y

Falling metal prices

96
Q

Core goods factors

A

Falling energy prices

Rising food prices (mainly dairy) => summer drought

Foreign firms exporting to the U.S. have little pricing power

Falling value of dollar will increase import prices

Input price growth will remiain remain due to uncertainty over: U.S. fiscal policy and Global economic growth

97
Q

Open Market Purchase

A
  1. Fed buys T-Bill from Bank A
  2. increase bank excess reserves
  3. r = reserve requirement = 10%
98
Q

Red fund rate and ___________ are very closely related

99
Q

______________ determine deposit rates

A

market rates

100
Q

Artificial stimulus

A

Monetary and fiscal stimulus

101
Q

Depressions can be good:

A

free up resources from dying to thriving industries

102
Q

Mal adjustment

A

Excess housing and debt of ‘05

103
Q

CPI target

104
Q

CPI late 70s early 80s

A

high inflation

12% 13%

105
Q

Money Market Liquidity Trap

A

Getting trapped in banks and not being lent out

Hoarding money (mattress, burying)

106
Q

2008 money demand becomes completely _________

A

elastic (horizontal)

Fed increases MS, but interest rates are unchanged because no spending or fall in interest rate so no shift in demand

107
Q

Exports fell _____________

A

3.6% to $181.2 million

108
Q

Exports above __________________

A

2007-2008 average

109
Q

Trade balance: recovery =>

A

fast growing investment based trade

  • capital goods
  • Industrial supplies and materials
110
Q

Trade balance: expansion =>

A

rise in consumption-based trade

111
Q

Imports decreased ________________

A

2% to $227.2 billion

112
Q

Imports below _______________

113
Q

Trade balance =

114
Q

Trade deficit rose to

A

-42.2 billion

115
Q

Trade deficit in goods

A

-59.1 billion

116
Q

Trade surplus in services

A

16.9 billion

117
Q

Reciprocal

A

one of a pair of numbers whose product is one

118
Q

Between 2002-2007 dollar exchange rate felll _____

119
Q

Between august 07 - august 08 dollar exchange rate fell ____

120
Q

Why is dollar exchange rate falling?

A
  1. Subprime credit mess => subprime currency
  2. Fed lowering money market rates (int. rates)
  3. weaker U.S. investment prospects
  4. Trade deficit
  5. U.S. budget deficit
  6. Inflation concerns
121
Q

As euro appreciates =>

A

imports fall

exports rise

122
Q

A change in real interest rates =>

A

Change in E (exchange rate)

zMacroeconomics (26 decks)

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